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Social trading is a form of investing that allows investors to observe the trading behavior of their peers and expert traders. The primary objective is to follow their investment strategies using
copy trading Copy trading enables individuals in the financial markets to automatically copy positions opened and managed by other selected individuals. Unlike mirror trading, a method that allows traders to copy specific strategies, copy trading links a port ...
or
mirror trading Mirror trading is a trading selection methodology that can be carried out in both the foreign exchange and the stock markets; however, this is much more common in trading in the foreign exchange market. The mirror trading method allows traders in ...
. Social trading requires little or no knowledge about financial markets.


History

One of the first social trading platforms was
eToro eToro is an Israeli social trading and multi-asset Investment management, investment company that focuses on providing Financial trading, financial and copy trading services. Its headquarters are located in Central District (Israel), Central I ...
in 2010, followed by Wikifolio in 2012. Europe-base
NAGA
listed on
Frankfurt Stock Exchange The Frankfurt Stock Exchange (german: link=no, Börse Frankfurt, former German name – FWB) is the world's 12th largest stock exchange by market capitalization. It has operations from 8:00 am to 10:00 pm ( German time). Organisation Locat ...
since 2017, claims more than EUR 27 billion was traded on its platform in the second half of 2019. Some of the contemporary social trading platforms other than mentioned already are Zulu Trade, Trading Motion, iSystems, FX Junction and Collective2.


Research

MIT The Massachusetts Institute of Technology (MIT) is a private land-grant research university in Cambridge, Massachusetts. Established in 1861, MIT has played a key role in the development of modern technology and science, and is one of the m ...
Computer Scientist and researcher
Yaniv Altshuler Yaniv Altshuler, (born 1978) is an Israeli computer scientist anentrepreneur He is a researcher at the MIT Media Lab, at the Human Dynamics group headed by professor Alex Pentland. In 2014 he co-foundeEndor an MIT spinoff, financially backed by ...
described social trading networks as
complex adaptive system A complex adaptive system is a system that is ''complex'' in that it is a dynamic network of interactions, but the behavior of the ensemble may not be predictable according to the behavior of the components. It is ''adaptive'' in that the individ ...
s, and in his 2014 research on eToro's OpenBook, wrote that "Having the inherent ability to share ideas and information between each others, OpenBook’s users are given a new source of information they can use in order to enhance their trading performance. As the users are not playing against each other but rather – against the market, this situation becomes a non zero-sum game, hence incentivizing the users to share as much information as possible." His paper concludes that "social trading provides much better opportunities for profiting compared with individual trading," but that users make "excellent but sometimes not optimal decisions in selecting experts when they can see others’ choices." A 2015
World Economic Forum The World Economic Forum (WEF) is an international non-governmental and lobbying organisation based in Cologny, canton of Geneva, Switzerland. It was founded on 24 January 1971 by German engineer and economist Klaus Schwab. The foundation, ...
report described social trading networks as disruptors, which "have emerged to provide low-cost, sophisticated alternatives to traditional wealth managers. These solutions cater to a broader customer base and empower customers to have more control of their wealth management," and "pose a tangible threat to the traditional practices of the wealth management industry". Economist
Nouriel Roubini Nouriel Roubini (born March 9 1958) is a Turkish-born Iranian-American economist. He is Professor Emeritus (2021–present) and was Professor of Economics (1995–2021) at the Stern School of Business, New York University, and also chairman of Ro ...
's thinktank predicted in 2016 that "newer forms of investment, such as socially responsible investments and social trading will bring some of the largest industry growth in the coming years." A 2017 St. John's University study found that 'leader' traders, or those with followers, are more susceptible to the
disposition effect The disposition effect is an anomaly discovered in behavioral finance. It relates to the tendency of investors to sell assets that have increased in value, while keeping assets that have dropped in value. Hersh Shefrin and Meir Statman identified ...
than investors that are not being followed by any other traders, with the authors suggesting the observation may be explained by "leaders feeling responsible towards their followers and an urge to not let them down, by fear of losing followers when admitting a bad investment decision and signaling confidence in their initial investment choice, or by an attempt of newly appointed leaders to manage their self-image." Social trading may potentially also change how much risk investors take. A recent experimental study argues that merely providing information on the success of others may lead to a significant increase in risk taking. This increase in risk taking may even be larger when subjects are provided with the option to directly copy others.


Characteristics

Social trading is an alternative way of analyzing financial data by looking at what other traders are doing and comparing and copying their techniques and strategies. Prior to the advent of social trading, investors and traders were relying on
fundamental Fundamental may refer to: * Foundation of reality * Fundamental frequency, as in music or phonetics, often referred to as simply a "fundamental" * Fundamentalism, the belief in, and usually the strict adherence to, the simple or "fundamental" idea ...
or
technical analysis In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis use many of the sam ...
to form their investment decisions. Using social trading investors and traders could integrate into their investment decision-process social indicators from trading data-feeds of other traders. Social trading platforms or networks can be considered a subcategory of
social networking service A social networking service or SNS (sometimes called a social networking site) is an online platform which people use to build social networks or social relationships with other people who share similar personal or career content, interests, act ...
s. Social trading allows traders to trade online with the help of others and some have claimed shortens the learning curve from novice to experienced trader. Traders can interact with others, watch others take trades, then duplicate their trades and learn what prompted the top performer to take a trade in the first place. By copying trades, traders can learn which strategies work and which do not work. Social trading is used to do speculation; in the moral context speculative practices are considered negatively and to be avoided by each individual. who conversely should maintain a long term horizon avoiding any types of short term speculation. There are three main types of trades: * Single (or non-social) trade: Trader A places a normal trade by himself or herself; * Copy trade: Trader A places exactly the same trade as trader B's one single trade; (iii) * Mirror trade: Trader A automatically executes trader B's every single trade, i.e., trader A follows exactly trader B's trading activities. Other variations offered on some platforms allow users to copy another trader's portfolio (copy portfolio), and follow a trader's dividends (copy dividends), where whenever a followed trader withdraws money from his or her account, a proportional amount of money will be withdrawn from the balance of their follower, in real time.


Key features

* Information flow: Unencumbered access to information is important in financial markets and that makes the free exchange of information of interest to small scale as well as individual investors. * Cooperative trading: Social trading offers traders the opportunity to work together in trading teams which can trade the markets collaboratively, whether by pooling funds, dividing research or through sharing information. * Monetization: As with social networks in the broader sense, monetization strategies are not always clear. As with social networks in general, it is possible, however, that the long-term worth of such websites may come from the variety and depth of data about their users which their active communities are likely to generate. * Transparency: Social trading platforms reveal traders' performance stats, open and past positions, and market sentiment, giving members complete information to assess the credibility of the contributors they follow on the platform.


See also

*
Algorithmic trading Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading attempts to leverage the speed and computational resources of ...
*
Trading strategy In finance, a trading strategy is a fixed plan that is designed to achieve a profitable return by going long or short in markets. The main reasons that a properly researched trading strategy helps are its verifiability, quantifiability, consistency ...


References

{{Investment management Financial services Social media